Global Economics

Markets React to Thai Coup

Two questions now hang over Asian economies following the surprise military ouster of Thai Prime Minister Thaksin Shinawatra on Sept. 19. What sort of damage would it inflict on a major regional economy and offshore auto manufacturing and parts production hub? And, more critically, would a sell-off of the Thai baht spill over into other neighboring currencies should jittery global investors indiscriminately stampede out of the region?

Asian markets reacted nervously to the first day of the post-Thaksin era. Thailand, now under the control of army chief Sondhi Boonyaratkalin, is under martial law and shut down its banks and the Bangkok Stock Exchange as of Sept. 20. Equity markets in Tokyo and Seoul registered declines of about 1%, Singapore stocks were down slightly, but the Kuala Lumpur Composite Index fell 2.5% and share prices were off 2% in the Philippines.

Currency traders, meanwhile, continued to sell off the Thai baht, which finished the day down a little more than 1% against the dollar. The Indonesia rupiah declined modestly against the greenback.

PRIME-TIME COUP. The market reaction could have been a lot worse, and investors seem to be keeping in mind the robust fundamentals of Asia's major economies. "The good news is that the initial shock is over," says Manu Bhaskaran, Asia director of consultancy Centennial Group in Singapore. "The markets are differentiating instead of lumping all of Asia in one basket and classifying them as 'vulnerable to coups,'" he adds.

The Thais, on the other hand, do seem to specialize in military-enforced changes in governments. Coups have been a regular feature of Thai political life going back six decades. The latest one kicked off at just after 9:30 p.m. local time in Bangkok when Sondhi ordered tanks under his command to take to the streets and later surround the Government House in Bangkok, the official residence of Prime Minister Thaksin.

The premier was in New York at the time and was scheduled to attend a special session of the U.N. General Assembly. He never arrived inside the U.N. building. It is uncertain when he will return to Thailand or in what capacity. Sondhi apparently has the backing of Thailand's revered monarch King Bhumibol Adulyadej, which could make a comeback by Thaksin unlikely.

LOSING POPULARITY. The coup has plunged Thailand into its deepest political crisis since 1991—and disrupted financial transactions and manufacturing around the region. At a press conference in Tokyo, Toyota (TM) CEO Katsuaki Watanabe said the auto maker had ceased production at its Thai plants and would continue in a holding pattern until the situation on the ground became clear. "There will be some impact on production and sales but to identify the degree of the impact we will have to wait a little more," he said.

Billionaire Thaksin swept into power in 2001 promising to be the "CEO prime minister," but his popularity and that of his ruling Thai Rak Thai party has drawn withering criticism from opposition parties and a big chunk of the public over the last year or so. His decision, as premier, to sell a 49.6% controlling stake owned by his family in listed conglomerate Shin to Singapore's Temasek Holdings in a tax-free transaction for $1.9 billion in January touched off a firestorm.

That dashed his ambitions to emerge as Southeast Asia's most influential leader. In April, he resigned his post and called an election to quiet his critics. His party won a majority in the Thai parliament, but the crisis election was boycotted by opposition parties and later annulled by a court. Before being deposed by force, Thaksin was serving as a caretaker premier until new elections could be arranged later in the year.

IMMEDIATE SELL-OFF. Regional economists suggest investors will divide on whether this is viewed as the removal of an unpopular premier—or a sign of deeper political instability. Cliff Tan, Southeast Asia economist for Citigroup (C), thinks it is the latter. The coup was "directed against one man who was a fairly controversial politician. I am hoping the markets will see this as a one-off thing instead of reading too much into it and will rebound eventually."

Most economists think there was a predictable sell-off when the news broke and investors scrambled to adjust their market positions. Thai-focused mutual funds listed in New York plunged Sept. 19 and credit rating agencies such as Standard & Poor's and Moody's Investor Services placed the country's sovereign credit rating on review for a possible downgrade.

Part of selling pressure was no doubt driven by memories of the 1997 Asian financial crisis when a plunge in the baht set off a chain reaction of currency and stock selling that eventually pushed South Korea, the Philippines, Indonesia, and even Japan into recession. No one is talking about a contagion impact this time around.

A BETTER PLACE. "Why should there be any contagion in Asia?" asks Michael Spencer, chief Asia economist for Deutsche Bank (DB) in Hong Kong. "We have all across Asia fiscal surpluses, current account surpluses, we have debt levels that are down dramatically from 1997." He adds that, "Thailand is probably better placed to weather this storm because it is in fact a net creditor to the world." Adds Tim Condon, regional economist for ING Bank in Singapore, "A lot has changed in the last 24 hours but basically Asia's structural growth story is intact."

Political instability aside, the fundamentals don't look bad in Thailand. The Thai economy grew at 5.5% in the first half of this year mainly led by net exports growth and rising tourist inflows. That said, the Thaksin drama has hit consumer confidence and business sentiment this year and the economy seems on a slower growth track through next year. Deutsche Bank is forecasting 4.5% GDP growth or slightly slower this year for Thailand and 3.5% growth next year.

When the Bangkok Stock Exchange resumes trading later in the week, the initial direction likely will be straight down, given the pent-up selling pressure. Among the hardest hit will be Shin and other listed companies associated with Thaksin's business interests, which are considerable in Thailand.

FROM TANKS TO TOURISTS. Yet there could be a bounce-back soon after, some suggest. "When Thai stocks start trading, the initial reaction will be a selldown," says Tan Chong Koay, chief investment officer and CEO of Pheim Asset Management, who helps manage more than $800 million in mainly Southeast Asian equities. "But a lot of investors will be looking at buying opportunities as well," he predicts.

Much will depend on how quickly Thailand makes the transition from tanks on the streets to a new government and some sense of normalcy. "The best-case scenario is that the new rulers will call for an election, things will stabilize over the next few months, tourism will pick up, and we will back on track within the next three to six months," says Citigroup's Tan.

One big wild card is whether Thaksin will try to regain control of the government, a scenario that could lead to a protracted political stalemate that would really hurt Thai economic growth. This much seems clear: This Thai political upheaval will be watched closely by global investors with any sizable chunk of change invested in Southeast Asia. Plenty are hoping this drama has no second act.